Nigeria’s Exchange Rate Policy Discourages Investors, Increases Inflation – World Bank

Nigeria’s External Reserves Dipped by $523m in Two Weeks
Nigeria’s External Reserves Dipped by $523m in Two Weeks.

Nigeria’s exchange rate management policies have been criticized by the World Bank as discouraging investment and fueling inflation

The bank announced this in its November Nigeria Development Update.

World Bank emphasized the CBN’s role in exchange rate stability, noting that the CBN constantly raised the nominal official exchange rate.

It added that the CBN’s system of managing foreign exchange was too rigid, causing inflation in the country.

The report read in part, “The government’s exchange rate management policies continue to discourage investment and fuel inflation. Exchange rate stability is a key CBN policy objective, and to preserve its external reserves the CBN continues to manage FX demand and limit the supply of FX to the market.

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“Pressure on the naira remains intense, and while the CBN has raised the nominal official exchange rate three times since the start of the pandemic (by 15 per cent in March 2020, five per cent in August 2020, and seven per cent in May 2021), FX management remains too rigid to respond to external shocks. Meanwhile, exchange-rate management has emerged as one of the key drivers of inflation.”

According to the report, CBN has yet to introduce sufficient flexibility into foreign exchange management in order to respond sustainably to external shocks, as the NAFEX rate does not represent the market rate correctly.

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It read in part, “While the CBN supplied an average of $2.5bn to the Investors and Exporters forex window in the months just prior to the COVID-19 crisis, it only supplied an average of $0.5bn in the months thereafter.

“The NAFEX rate, which is now the guiding exchange rate for the economy, continues to be managed and is not fully reflective of market conditions. The parallel market premium over the NAFEX rate reached 29 per cent in August 2021 after the CBN cut off its weekly supply of $20,000 per bureau de change. The CBN has intermittently supplied forex to BDCs since 2005, providing ample opportunities for currency round-tripping.”

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The World Bank recommended that a more predictable, transparent, and flexible foreign exchange management system would be essential for attracting and maintaining private investment flows.

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